chapter 3-1 managerial accounting, sixth edition process costing 3

Chapter 3-1

Managerial Accounting, Sixth Edition

Process CostingProcess Costing

3

Chapter 3-2

Learning objectives

1. Understand who uses process cost systems.2. Explain the similarities and differences between job

order cost and process cost systems.3. Explain the flow of costs in a process cost system.4. Make the journal entries to assign manufacturing

costs in a process cost system.5. Compute equivalent units.6. Explain the four steps necessary to prepare a

production cost report.7. Prepare a production cost report.

Chapter 3-3

Chapter 3-4

Use to apply costs to similar products that aremass-produced in a continuous fashion

Examples include the production ofCereal, Paint, and Soft Drinks

Illustration 3-1

LO 1 Understand who uses process cost systems.

Nature of Process Cost SystemsNature of Process Cost Systems

Uses of Process Cost Systems

Chapter 3-5

Illustration 3-2



Process and Job Cost Comparison

Chapter 3-6

Which of the following items is not a characteristic of a process cost system:

a. Once production begins, it continues until the finished product emerges.

b. The focus is on continually producing homogenous products.

c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.

d. The products produced are heterogeneous in nature.

Review Question



a. Once production begins, it continues until the finished product emerges.

b. The focus is on continually producing homogenous products.

c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.

d. The products produced are heterogeneous (different) in nature.

Chapter 3-7

Service companies that provide specific, nonroutine services will probably benefit from using a job order cost system. Those that perform routine, repetitive services will probably be better off with a process cost system.



Process Costing for Service Companies

Chapter 3-8

LO 2 Explain the similarities and differences between job order cost and process cost

systems.


Similarities and Differences Between Job Order Cost and Process Cost Systems

Job Order CostCosts assigned to each job.

Products have unique characteristics.

Process CostCosts tracked through a series of connected manufacturing processes or departments.

Products are uniform or relatively homogeneous and produced in a large volume.

Chapter 3-9

Illustration 3-3


systems.


Similarities and Differences

Chapter 3-10


systems.


Similarities1. The manufacturing

cost elements.

2. The accumulation of the costs of materials, labor, and overhead.

3. The flow of costs.

1. The number of work in process accounts used.

2. Documents used to track costs.

3. The point at which costs are totaled.

4. Unit cost computations.

Differences

Chapter 3-11

Illustration 3-4


systems.

Job Order versus Process Cost Job Order versus Process Cost SystemsSystemsSimilarities and Differences

Chapter 3-12

a. Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.

b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.

c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.

d. Manufacturing costs are assigned the same way in a job order and in a process cost system.

Indicate which of the following statements is not correct:Review Question


systems.


a. Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.

b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.

c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.

d. Manufacturing costs are assigned the same way in a job order and in a process cost system.

Chapter 3-13

Indicate whether the following statements are true or false.

1. A law firm is likely to use process costing for major lawsuits.

2. A manufacturer of paintballs is likely to use process costing.

3. Both job order and process costing determine total costs at the end of a period of time.

4. Process costing does not keep track of manufacturing overhead.

False

True

False


systems.


False

Chapter 3-14


Process Cost Flow

LO 3 Explain the flow of costs in a process cost system.

Illustration 3-5

Tyler Company manufactures automatic can openers that it sells to retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.

Chapter 3-15

Accumulation of materials, labor, and overhead costs is same as in job order costing. Debit Raw Materials Inventory for purchases of

raw materials. Debit Factory Labor for factory labor

incurred. Debit Manufacturing Overhead for overhead

cost incurred.Assignment of the three manufacturing cost elements to Work in Process is different.


Assigning Manufacturing Costs

LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

Chapter 3-16

A process cost system requires fewer material requisition slips than a job order cost system. Materials are used for processes and not

specific jobs Requisitions are for larger quantities of

materials Journal entry to record materials used:


Material Costs


Chapter 3-17

Time tickets may be used in both systems.

All labor costs incurred within a production department are a cost of processing.

The journal entry to record factory labor costs:


Factory Labor Costs


Chapter 3-18

Objective of assigning overhead. Allocate overhead to departments on an objective

and equitable basis.Use the activity that “drives” or causes the costs.Machine time used - primary driver.

Journal entry to allocate overhead:


Manufacturing Overhead Costs


Chapter 3-19

Monthly Entry to transfer goods to next department:


Transfer Costs


Entry to transfer completed goods to Finished Goods:

Entry to record Cost of Goods sold at the time of sale:

Chapter 3-20

In making the journal entry to assign raw materials costs:

a. The debit is to Finished goods Inventory.b. The debit is often to two or more work

in process accounts. c. The credit is generally to two or more

work in process accounts.d. The credit is to Finished Goods

Inventory.

Review Question



a. The debit is to Finished goods Inventory.b. The debit is often to two or more work

in process accounts. c. The credit is generally to two or more

work in process accounts.d. The credit is to Finished Goods

Inventory.

Chapter 3-21

Ruth Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.



Chapter 3-22

Journalize the assignment of these costs to the two processes.


To Record Materials Used:Work in Process—Blending 18,000

Work in Process—Bottling 4,000Raw Materials Inventory

22,000To Assign Factory Labor to Production:

Work in Process—Blending 12,000Work in Process—Bottling 5,000

Factory Labor17,000

LO 4

Chapter 3-23

Journalize the assignment of these costs to the two processes.


To Assign Overhead to Production:Work in Process—Blending 6,000Work in Process—Bottling 2,500

Manufacturing Overhead 8,500


Chapter 3-24

Journalize the transfer of units as appropriate.


To Record Transfer of Units to the Bottling Department:Work in Process—Bottling 19,000

Work in Process—Blending 19,000

To Record Transfer of Units to Finished Goods:Finished Goods Inventory 11,000

Work in Process—Bottling 11,000


Chapter 3-25 LO 5 Compute equivalents units.

Equivalent UnitsEquivalent Units

Illustration: Suppose you have a work-study job in the office of your college’s president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college’s vice president for finance provides the following information.

Illustration 3-6

Chapter 3-26

Total cost of instruction $9,000,000Number of full-time equivalent students / 1,500

$ 6,000LO 5 Compute equivalents units.

Illustration 3-7


Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.

Cost of instruction per full-time equivalent student =

Chapter 3-27

Illustration: The output of the Company’s Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed. Calculate the equivalent units of production.


LO 5 Compute equivalents units.

Weighted-Average Method

Completed units 10,000Work in process equivalent units (5,000 x 70%) 3,500

13,500

Chapter 3-28

Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process.Most widely used method.Beginning work in process not part of computation of equivalent units.

Illustration 3-8


Weighted-Average Method


Chapter 3-29

Illustration: Kellogg Company has produced Eggo® Waffles since 1970. Three departments produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter.Illustration 3-9 provides information related to the Mixing Department at the end of June.



Refinements on the Weighted-Average Method

Chapter 3-30

Illustration: Information related to the Mixing Department at the end of June.

Illustration 3-9



Refinements on the Weighted-Average Method

Chapter 3-31

Conversion costs are labor costs plus overhead costs.Beginning work in process is not part of the equivalent-units-of-production formula.


LO 5 Compute equivalents units.Illustration 3-10

Chapter 3-32

Illustration 3-11



Refined Equivalent Units of Production Formula

Chapter 3-33

The Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversions costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:

a. 22,600 b. 23,000 c. 24,000 d. 25,000

Review Question



a. 22,600 b. 23,000 c. 24,000 d. 25,000


The fabricating department has the following production and cost data for the current month.


Beginning Units EndingWork in Process Transferred Out Work in Process

–0– 15,000 10,000

Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.





–0– 15,000 10,000

Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000Ending work in process units 10,000

25,000





–0– 15,000 10,000

Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000Equivalent unit in ending WIP (10,000 x 30%) 3,000

18,000

Chapter 3-37

Key document used to understand activities.

Prepared for each department and shows Production Quantity and Cost data.Four steps in preparation:

Step 1: Compute physical unit flowStep 2: Compute equivalent units of productionStep 3: Compute unit production costsStep 4: Prepare a cost reconciliation schedule


Production Cost Report

LO 6 Explain the four steps necessary to prepare a production cost report.

Chapter 3-38

Illustration 3-12


Production Cost Report


Chapter 3-39 Illustration 3-13

Comprehensive Example of Process Comprehensive Example of Process CostingCosting

Illustration: Assumed data for the Mixing Department at Kellogg Company for the month of June.

LO 6

Chapter 3-40

Physical units - actual units to be accounted for during a period, regardless of work performed.

Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period.

Total units accounted for - units transferred out during period + units in production at end of period.

Compute the Physical Unit Flow (Step 1)



Chapter 3-41 LO 6 Explain the four steps necessary to prepare a production cost

report.



Illustration 3-14

Chapter 3-42

Department Adds materials at beginning of the process. Incurs conversion costs uniformly during the

process.

Illustration 3-15


Comprehensive Example of Process Comprehensive Example of Process CostingCostingCompute Equivalent Units of Production (Step 2)

Chapter 3-43

Costs expressed in terms of equivalent units of production.When equivalent units of production are different for materials and for conversion costs, three unit costs are computed:

1. Materials2. Conversion3. Total Manufacturing


Comprehensive Example of Process Comprehensive Example of Process CostingCostingCompute Unit Production Costs (Step 3)

Chapter 3-44 LO 6


Compute total materials cost related to Eggo® Waffles: Work in process, June 1

Direct materials costs $ 50,000Cost added to production during June

Direct material cost 400,000 Total material costs $450,000

Illustration 3-17

Illustration 3-16

Chapter 3-45 LO 6


Compute total conversion costs related to Eggo® Waffles: Work in process, June 1

Conversion costs $ 35,000Costs added to production during June

Conversion costs 170,000 Total conversion costs $205,000

Illustration 3-18

Illustration 3-19

Chapter 3-46 LO 6


Compute total manufacturing costs per unit: Illustration 3-20

Illustration 3-19

Chapter 3-47

Comprehensive Example of Process Comprehensive Example of Process CostingCostingPrepare a Cost Reconciliation Schedule (Step 4)Kellogg charged total costs of $655,000 to the Mixing

Department in June, calculated as follows.

Costs to be accounted forWork in process, June 1 $ 85,000Started into production 570,000

Total costs $655,000Illustration 3-21


Chapter 3-48

Comprehensive Example of Process Comprehensive Example of Process CostingCostingPrepare a Cost Reconciliation Schedule (Step 4)

Illustration 3-22

Chapter 3-49


Prepare the Production Cost Report

Illustration 3-23

LO 7

Chapter 3-50

Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:

a. $45,000.b. $55,000.c. $75,000.d. $100,000.

Review Question

LO 7 Prepare a production cost report.

a. $45,000.b. $55,000.c. $75,000.d. $100,000.


Chapter 3-51

In March, the Manufacturing Co. had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March the company transferred out 12,000 units. As of March 31, 800 units that were 25% percent complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.

Costs transferred out $180,000Work in process, March 31

Materials (800 x $6) $4,800Conversion costs (200 x $9) 1,800 6,600

Total costs $186,600LO 7 Prepare a production cost report.


Chapter 3-52

Companies often use a combination of a process cost and a job order cost system.Called operations costing, this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product.At the same time, the product may have some customized, individual features that require the use of a job order cost system.

Costing Systems – Final Comments

LO 7 Prepare a production cost report.


Chapter 3-53

..

LO8 Compute equivalent units using the FIFO method.

Equivalent Units Under FIFOEquivalent units are the sum of the work performed to:

1. Finish the units of beginning work in process inventory.

2. Complete the units started into production during the period (referred to as the units started and completed).

3. Start, but only partially complete, the units in ending work in process inventory.

FIFO Method

Chapter 3-54

..


Equivalent Units Under FIFOIllustration 3A-1 shows the physical flow of units for the Assembly Department of Shutters Inc.

Illustration 3A-1

FIFO Method

Chapter 3-55 LO8 Compute equivalent units using the FIFO

method.

FIFO Method

Equivalent Units Under FIFOIllustration: Equivalent units for the Assembly Department is computed as follows:

Illustration 3A-2

Chapter 3-56 LO8

FIFO Method


Illustration 3A-3

Unit and Cost

Data – Mixing

Department

Chapter 3-57

FIFO Method


Illustration 3A-4

Physical Unit Flow

- Mixing Departmen

t


Chapter 3-58

FIFO Method


Illustration 3A-5

Physical Unit Flow (FIFO) - Mixing

Department


The Mixing Department must account for 900,000 units. 700,000 units were transferred to the Baking Department and 200,000 units were still in process.

Chapter 3-59

FIFO Method

Compute Equivalent Units of Production (Step 2)Equivalent Units For Materials


Kellogg adds materials at the beginning of the process. In addition, 100 percent of the materials costs has been incurred on the ending work in process.

Illustration 3A-6

Chapter 3-60

FIFO Method

Compute Equivalent Units of Production (Step 2)Equivalent Units For Conversion Costs The Mixing Department required 30,000 equivalent units (30% 100,000 units) of conversion costs to complete the beginning inventory. In addition, the 200,000 units of ending work in process were 60 percent complete in terms of conversion costs.

Illustration 3A-7 LO8

Chapter 3-61

Under the FIFO method, the unit costs of production are based entirely on the production costs incurred during the month.

FIFO Method

Compute Unit Production Costs (Step 3)

Illustration 3A-8


Chapter 3-62

Compute the unit materials cost, unit conversion costs, and total unit cost.

FIFO Method

Compute Unit Production Costs (Step 3)

Illustration 3A-9LO8 Compute equivalent units using the FIFO

method.

Chapter 3-63

Kellogg is now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. The total costs charged to the Mixing Department in June are as follows.

FIFO Method

Prepare a Cost Reconciliation Schedule (Step 4)

Illustration 3A-10


Chapter 3-64

Kellogg next prepares a cost reconciliation to assign these costs to (1) units transferred out to the Baking Department and (2) ending work in process.

FIFO Method

Prepare a Cost Reconciliation Schedule (Step 4)

LO8Illustration 3A-11

Chapter 3-65

Internal document for management that shows production quantity and cost data for a production department.Provides a basis for evaluating the productivity of a department. Managers can use the cost data to assess whether unit costs and total costs are reasonable.Top management can also judge whether current performance is meeting planned objectives.

FIFO Method



Chapter 3-66


FIFO Method

LO8

Illustration 3A-12

Chapter 3-67 LO8 Compute equivalent units using the FIFO

method.

FIFO Method

FIFO and Weighted-AverageWeighted-average is simple to understand and apply. In cases where prices do not fluctuate significantly, weighted-average will be very similar to FIFO. Conceptually, the FIFO method is superior because it measures current performance using only costs incurred in the current period. FIFO method provides current cost information, which the company can use to establish more accurate pricing strategies for goods manufactured and sold.

Chapter 3-68

CopyrightCopyright

“Copyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”